An equipment lease agreement with option to purchase is a type of contract where you and your lessor agree that at the end of your lease term you have the option to purchase the equipment.
This is very different from a lease purchase in that the lease purchase obligates you to purchase the property at the end of the lease period while the lease option does not. The equipment lease agreement with option to purchase is useful to those who cannot qualify for a loan from the bank due to credit issues. If you are unable to purchase the equipment at the end of the lease period, then you can request the equipment leasing company to either extend or renew the lease or return the equipment.
There are two common types of leases in which you can use to acquire equipment today: fair market value and $1 buyout option. The $1 buyout option is usually used by businesses that know at the end of the lease period, they will still need the equipment. The good thing about the $1 buyout option is that you will have the opportunity to purchase the equipment at $1 at the end of the lease term. It also comes with additional benefits such as interest expense benefits and depreciation for tax benefits. Unfortunately, this lease comes with higher monthly lease payments than a fair market value lease because you will be financing 100% of the equipment cost.
A fair market value lease on the other hand is much more flexible than the $1 buyout lease. It has lower monthly payments and is suitable for businesses that want to make the lowest monthly payments but are unsure if they want to purchase the equipment at the end of the lease term. You will also have the privilege of deducting monthly lease payments as an operating expense. Not only that, but at the end of the lease period you can decide to return the equipment, upgrade it or purchase it.
How An Equipment Lease Agreement With Option To Purchase Works
The details of how a particular equipment lease agreement with option to purchase works may vary from one equipment leasing company to another but there’s a basic structure commonly used.
The way a lease option works is very simple and only a few elements are required. You and your lessor will set up a certain lease rate and certain lease term. The agreement will give you the option or right to purchase the property on or after the lease period at an agreed upon price.
A portion of your monthly lease payments will be credited towards your equipment purchase. The accrued lease credits will be like a partial down payment for the equipment and from there you can choose to purchase at $1 or at fair market value depending on what type of an agreement you got into.
The good thing about the equipment lease agreement with option to purchase is that you will buy yourself sometime to work on your credit if it is damaged. Furthermore, if the price of your leased equipment goes down significantly during the lease period, you can re-negotiate with your lessor when it’s time to make a purchase.
Are There Any Downsides Of The Equipment Lease Agreement With Option To Purchase?
Yes, there are definitely some risks that come with an equipment lease agreement with option to purchase but only if you do not take certain steps to avoid them. As it is always mentioned, everything on an equipment lease agreement can be negotiated.
This is why you should work with your local lease attorney to help you review and draw up lease option forms that will benefit your business in the long run. The lease to purchase contracts are not standardized so you should understand all the specifics of the contract. This includes timely lease payments and how you are supposed to exercise the purchase option.
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If you are unable to purchase the equipment at the end of the lease period, the lessor will simply take back the equipment which means all that money you spent towards acquiring the equipment will go to waste; the money will be forfeited and go towards the lessor. Make sure that before you get into an option to purchase agreement, you can afford to purchase the equipment at the end of the lease period.
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